The Problematic Lithuanian Pension System

There is a saying that “great neighbors require great fences”. It means that in order to avoid conflict, we need to know what belongs to whom, and who is responsible for what. If the boundaries are not clear, a conflict is bound to emerge.

This principle is also valid when talking about society and its inner relationships. One of the conflicts that arises from an unclear assignment of resources and responsibilities is now racing between the pensioners and the working class (future pensioners). The governmental pension system and government’s lack of ability to draw clear boundaries between what belongs to whom has now created a false tension in the Lithuanian society.

Recently, a group of pensioners went on a protest demanding higher pensions. The publicly released resolution also demanded that tax transitions to second pillar private pension funds from state and public social insurance budgets be phased out at once. It also called for a EUR 60 one-off compensation for the misappropriated pensions paid out to second pillar pension funds.

We can understand the pensioners; the pensions in Lithuania are not very high. They feel that the working class people transferring their social insurance taxes to second pillar pension funds are somehow a threat to their own pensions. As if that is the reason why their pensions are smaller than they would be otherwise… After all, the money of the working class (which pays for their pensions) ultimately ends up in personal accounts rather than the social insurance budget.

However, the perspective of the working class is different. By saving money, they take care of their own future. Up until now, over a million of citizens opted to get smaller governmental pensions by transferring part of the taxes payed for social insurance to the second pillar pension funds. 425,000 of these people agreed to pay an extra 2% from their monthly salary in order to save more and consequently have an alternative financial source in the future. They find it reasonable, as the ageing population in Lithuania makes for a vague future in terms of governmental pensions.

In the light of the pensioners’ wish to stop the working population from taking care of their own future, an attempt to force them to pay for compensations seems like a slap in the face. The working class already gives away over 40% of their salary in taxes. A big part of these taxes is dedicated to taking care of pensioners. Shouldn’t we be able to save a few percent of their income to secure our future?

Here is where the paradox of the governmental pension fund system reveals itself. The system is based on the idea that the citizens are not capable of saving for their own pensions. Therefore, the government does it for them. By doing so, the government puts all its citizens in a system, where their personal initiative to save for their future puts the system itself in danger. Such a system is not a desirable one, to say the least.

Moreover, the government is persistent in reminding us that we have to show solidarity in helping one another and that allegedly the social insurance system reflects this “solidarity”. In addition, through such a system we take care of those in need, including ourselves. However, forced solidarity creates a contradiction – the working class taking care of themselves seems to oppose the interests of the pensioners, while helping the pensioners more would result in a greater burden on the workers. The pursuit of solidarity leads to a conflict of interests.

So, who is right, and who is wrong – the pensioners or the working class? The problem lies in the fact that in this system of governmental pensions, everyone is both right and wrong at the same time. This is due to the aforementioned lack of boundaries – it is not clear what belongs to whom and who is responsible for what. This is not just another incidental consequence of the governmental pension fund system. As soon as the government decides that 40% of one’s money belongs to everyone, a conflict will undoubtedly arise. The budget will always be tight. And there will always be more than enough people to claim it.

Vice President and research director at Lithuanian Free Market Institute. His fields of expertise include shadow economy, monetary policy, financial markets and business conditions. Vytautas also is responsible for the quality of research conducted at LFMI. Vytautas graduated from Vilnius University and holds a Master’s degree in Economics and Banking.

The Lithuanian Free Market Institute (LFMI) is a private non-profit non-partisan organisation established in 1990 to promote the ideas of individual freedom and responsibility, free market, and limited government.